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Economics References Committee
01/07/2015
Corporate tax avoidance

FORSTNER, Mr Marco, Financial Controller, Australia and New Zealand, AstraZeneca Pty Ltd

GALLAGHER, Mr David, Chairman and Managing Director, Pfizer Australia Pty Ltd

GEIGER, Ms Melissa, Global Head of Tax, GlaxoSmithKline

GEORGE, Mr Tony, Head of Finance Operations, Australia and New Zealand, Pfizer Australia Pty Ltd

McDONALD, Mr Geoffrey Michael, Vice President and General Manager, GlaxoSmithKline Australia Ltd

SHARKEY, Mr James, Director Market Access, External Affairs, Commercial Innovation and Legal, AstraZeneca Pty Ltd

Committee met at 09:09

CHAIR ( Senator Dastyari ): Welcome. I declare open this hearing of the Senate Economics References Committee inquiry into corporate tax avoidance and aggressive minimisation by Australian companies and multinationals operating in Australia. The Senate referred this inquiry to the committee on 2 October 2014 for report by the first sitting day in June 2015. On 15 June 2015, the Senate granted an extension of the committee to report by 13 August. The committee has received 111 submissions so far which are available on the committee's website. Three submissions have been received as confidential. These are public proceedings, although the committee may determine or agree to have evidence in heard.

I remind all witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may also be made at any other time.

I welcome Mr James Sharkey and Mr Marco Forstner from AstraZeneca, Mr David Gallagher and Mr Tony George from Pfizer Australia and Mr Geoff McDonald and Ms Melissa Geiger from GlaxoSmithKline Australia. Thank you so much for being available and appearing before the committee today. I also want to thank your three firms for the submissions you made. I understand and know that these are not easy things to put together and they do take up time and resources. The speedy manner in which you produced them and the ease with which the secretariat was able to organise an appropriate time for you to appear is very much appreciated.

I know senators will have a fair few questions for you, but I now invite you to make some brief opening remarks if you so choose—and can I please stress the word 'brief'. No doubt we will run over time, but we will try to minimise how much we run over time today.

Mr McDonald : Thank you very much. I do have a short opening statement. I am joined today by Melissa Geiger, our Global Head of Tax. Together, we believe we will be able to address the questions the committee has for us regarding our operations. We welcome the committee's work and we want to maintain an open and transparent relationship with authorities world wide.

GSK is a science-led global healthcare company, and we research and develop innovative medicines in three areas: pharmaceuticals, vaccines and consumer medicines. Business primarily in Australia consists of the distribution of products into the marketplace. We also perform some small manufacturing activities. Our parent company is GSK PLC, headquartered in the UK. We have a globally significant presence with operations in 115 different countries and a network of 84 manufacturing sites. We have R&D largely in the UK, the US and Belgium.

In a pharmaceutical company, the key value driving asset is the creation and management of intellectual property. The majority of GSK's IP is in the UK, the US and Belgium. The price paid for products containing the IP ensures an appropriate financial reward. The cost of developing a new prescription medicine is over a billion pounds, on current valuation. In addition to this, it takes on average 12 to 15 years from the early pre-clinical trials through to when a medicine is launched. Most of the returns from that IP are used to fund further research and development.

With regard to tax issues, we understand our responsibility to pay an appropriate amount of tax, and we fully support efforts to ensure companies are appropriately transparent about how their tax affairs are managed. We as a consolidated group make a profit on the sale of a product to a consumer and we expect as a group to pay tax on 100 per cent of that profit. As a primary distributor in Australia, we are at the end of an international IP and value chain. So the price at which GSK sells to a consumer is the final realisation by the GSK group of the value that is contributed throughout our value chain—often international. Under international tax rules, each part of that supply chain needs to be appropriately remunerated and taxed on the value it has added at the location where that has taken place. So worldwide we pay a significant amount of tax, including corporation other business taxes in Australia. Over the last 10 years, we have paid $192 million in corporate tax. And for 2014 we expect to pay $9½ million in corporate tax.

I would like to highlight the fact that we have an advanced pricing agreement with the Australian Taxation Office. The agreement was reached after rigorous examination of our business by the ATO, and we think it is a good example of a tax authority striking the right balance of preserving the integrity of a country's tax system and also recognising the international nature of a company such as ours.

Looking ahead, GSK is committed to working with governments and international partners to provide greater certainty and transparency in the international tax system for the benefit of taxpayers and tax authorities alike. As such, we support the efforts of the OECD's base erosion and profit-shifting project and believe that pursuing reform through the international consensus is the most effective way to achieve reform on a global basis. Thank you.

CHAIR: Thank you for that, Mr McDonald. Mr Sharkey, do you have an opening statement?

Mr Sharkey : Firstly, I would like to thank you for inviting AstraZeneca to participate in the public hearing today. I am AstraZeneca Australia's director of market access, external affairs, commercial innovation and legal. I am also the company's secretary for the Australian operation. I appear today with Mr Forstner, the financial controller for the Australian operation.

Normally, for an event such as this, we would have our Australian managing director in attendance but we have recently had a change in that role. The incoming managing director has only been in the role for less than a month, so we thought in the circumstances that it would be more helpful for the inquiry if I was to come. I will do my best to answer your questions today.

I would like to use the opening statement to assist the inquiry to understand our business in Australia. This in turn determines our revenue. It determines the cost of our operation and it determines our taxable income.

AstraZeneca is a company that has had a footprint in Australia for almost 60 years. From the establishment of our Australian operations in 1957 in a converted former World War II canteen in Rocklea in Brisbane, we have grown to become a cornerstone of the Australian medicines industry. Millions of Australians take AstraZeneca medicine every year—Australians who have had heart attacks or who are at risk of having heart attacks; Australians suffering from diabetes; from chronic respiratory illness; from asthma; from cancer; and the list goes on. It includes many of the anaesthetics and pain control treatments that are used in Australia.

In short, we are a proud participant in the Australian healthcare landscape and we have the patients to centre everything that we do. Less well known but something that we are also very proud of is our contribution to Australian manufacturing and exports. While our car and shipbuilding industries slow or decline, we are growing our investment in Australian health care.

In the four years between 2013 and 2016, we are investing over $100 million in new machinery to expand our Australian manufacturing operations in North Ryde in Sydney. Much of this investment is driving the export of medicines to China and Japan—vital Australian trade partners. To give some context to this, by 2023, we forecast that we will be exporting over 800 million units of, one, respiratory medicine alone to China alone. This is an almost threefold increase from today, which is 200 million units.

We are a wealth-creating industry for the dozens of Australian owned suppliers who, in partnership with us, are helping to change the health outcomes of millions of people around the world who receive an AstraZeneca medicine that is manufactured here in Australia.

In research and development, AstraZeneca has 55 clinical trials operating throughout the country, helping to bring the next generation of medicines to Australians suffering from chronic and acute illness. In 2015, we are increasing the number of trials that we run in Australia by 20 per cent.

Our distribution, manufacturing and research activities in Australia are undertaken by almost 900 highly skilled Australians that AstraZeneca employs in this country. Our employees are focused on getting innovative medicines out of the labs and into the patients that need them.

We engage in all of our activities in compliance with domestic and relevant international laws and regulations. This includes in relation to taxation in respect of which we abide by both the letter and the spirit of the law. We prepare our accounts with the assistance of external professional service providers. We lodge our tax returns on time. We pay our tax on time and we pay our tax in full.

I invite senators to look at page 6 of our submission. On page 6, we have provided the amount of tax AstraZeneca Australia has paid in 2012, 2013 and 2014. To be clear: these are the actual amounts of money which AstraZeneca has transferred to the Australian Taxation Office.

Our statutory accounts have been reviewed and certified by independent auditors. After a review in 2010, the Australian Taxation Office rated our processes and documentation as being of medium to high quality. The ATO considered that our level of profit in Australia was commercially realistic and determined that our risk of a transfer pricing audit was low. In 2013 the Australian Taxation Office advised us they had categorised us as a lower risk taxpayer in relation to both income tax and goods and services tax. AstraZeneca Australia is a compliant Australian company that distributes medicines to millions of Australians every year. We are a company that invests in Australian manufacturing, research and development and jobs. We are part of a group whose purpose is to push the boundaries of science to deliver life-changing medicines. I hope this has been a helpful overview of our company.

Mr Gallagher : Thank you for the opportunity to present today. Pfizer Australia is proud of the contribution we make to the health of Australians and the contribution we make to the Australian economy. We understand that the community has considerable expectations of a company like Pfizer and we are pleased to respond to that by participating today.

I want to spend a moment to outline what we do at Pfizer Australia. Pfizer is one of Australia’s leading providers of prescription medicines and consumer health products. We manufacture and deliver medicines and vaccines that millions of Australians use every year to live longer, healthier and more productive lives. Our portfolio covers some of Australia’s biggest health burdens such as cardiovascular disease and oncology, as well as a number of rare diseases like haemophilia. We have a strong pipeline of promising new medicines and vaccines that tackles some of today’s most challenging diseases. In 2015, for example, we will bring to patients in Australia new medicines for rare types of lung cancer and rheumatoid arthritis. We are very proud of these achievements. We make a positive economic contribution in Australia in two main ways. Our medicines reduce hospitalisations and improve wellness, thereby reducing the overall healthcare spend and improving work productivity. We also contribute to the Australian economy through our business operations. We employ over 1,100 colleagues here in sales, marketing, clinical research and manufacturing across the country, and many thousands more indirectly. Our headquarters are in Western Sydney and we have manufacturing sites in Western Sydney and in Perth.

From the outset, we want to be clear about one key principle of our tax affairs: Pfizer complies with all applicable laws and regulations in Australia and wherever we operate. The company does not tolerate improper conduct that violates our compliance procedures. Pfizer practices have been subject to rigorous review and have not resulted in any disputes with the ATO or adjustments to the tax filings. Our business is subject to the requirements of the ATO for tax compliance and of the Australian Corporations Act and Australian Accounting Standards for financial reporting. Our annual financial statements are audited under local and US accounting standards and continue to be unqualified.

Pfizer Australia is aware of the public discussions around transfer pricing. We are pleased to take this opportunity to reinforce our commitment to ensuring our transfer pricing policies and procedures are in compliance with Australian transfer pricing regulations as well the OECD arm’s length principles. In accordance with best practices and in the interests of transparency, Pfizer Australia engages a major accounting firm to review its transfer pricing annually. Pfizer Australia undergoes a regular client risk and transfer pricing record review by the ATO. The most recent review was undertaken in 2013. The review identified no issues and confirmed that no further action was required. I would like to reiterate that Pfizer practices have been subject to rigorous review and have not resulted in any disputes with the ATO. Pfizer Australia will continue to work transparently and cooperatively with the ATO to ensure our continued compliance.

On the core matter of effective tax rates, we advise that our average effective tax rate for the past four years is 40 per cent. The effective tax rate has ranged from 37 per cent to 48 per cent over those years, which is above the statutory corporate rate of 30 per cent. Combining income tax, GST, FBT, payroll tax, stamp duty and land tax, Pfizer Australia has disbursed more than $665 million in taxes over the past four years. We believe that this demonstrates our strong contribution to Australia and its economy. We want to be clear that Pfizer Australia records all sales in Australia as revenue and incurs significant wages and manufacturing costs here in Australia. We also want to be clear on a misconception perpetuated by external commentators with regard to effective tax rate—a misconception that has been cast across a number of industries. Income tax is paid on profit rather than revenue. In closing, I am proud of the work we do at Pfizer. Our financial records paint a picture of our strong financial contribution to Australia’s economy through our paid taxes and the jobs we provide. Above all, I am proud of the medicines we bring to Australians every day to help people live longer, healthier and more productive lives.

CHAIR: Thank you. I have got a few questions and I know that other senators have questions as well. Before we do that, just to make sure everyone is aware: we have held several sessions of hearings and I want to put on the record that the tax commissioner will be coming this afternoon. The tax commissioner has made it very clear that he will be commenting on the evidence that is provided by your companies. I am sure you are well aware of that. I also want to put on the record what the tax commissioner has actually said and, in fairness, what Medicines Australia have said. On 2 June, at Senate estimates, the tax office was asked about pharmaceutical companies and the tax commissioner said:

The most prevalent risk in the pharmaceutical industry is transfer pricing , because they are manufacturing drugs offshore and selling them in Australia, and the transfer prices are the real question.

He went on to say:

The sale happens here in Australia and then the attempt is made to back the profit out through pricing or royalties. Not all companies do this. There is a range. Some we have no issues with. We enter into the APAs—they typically have a limited life of two or three years—and then we renew them. For some that it is quite a straightforward process. Others are in a different position—where we find the more aggressive transfer pricing.

To give it more balance, the comment from Medicines Australia was: 'Pharmaceutical companies have a long history of working collaboratively with the Australian tax office, ATO, through advance pricing agreements to ensure that any transfer pricing is done on an arms-length basis. This mutually beneficial arrangement has ensured that pharmaceutical companies have actively managed their tax obligations.'

For the purpose of time, let us not pussyfoot around with what the issue is here. The issue is not that you provide an invaluable service. You obviously do. The issue is not that you do provide good jobs to Australian workers—well-paid jobs, the kinds of jobs that Australia wants to attract. That is not in dispute and that is not what we are here to question. The question is whether your tax arrangements have been structured in such a way as to minimise your tax obligations in this country. That is the nub of what we are here to talk about today. Mr Gallagher, Pfizer Australia is a wholly-owned subsidiary. Who are you a subsidiary of?

Mr Gallagher : The local holding company is owned by a Dutch entity. Tony, do you want to clarify the structure?

Mr George : Yes. Our local holding company is owned by a combination of two Netherlands entities and a Luxembourg entity—wholly owned.

CHAIR: In my research I read that your parent company is an Irish company. Is that not correct?

Mr Gallagher : Not our local holding company, no.

CHAIR: So you are a subsidiary of. So explain to me: it is part-owned by two separate Dutch companies and a Luxembourg company.

Mr Gallagher : Tony, do you want to go through the detail of the arrangements?

Mr George : Yes. Pfizer Australia Holdings is owned by a combination of two Netherlands companies and a Luxembourg company. They hold particular portions of shares. The ultimate holding company of those companies is Pfizer Inc. That is a US company.

CHAIR: So there is no Irish parent company in the process. You are part owned by two Dutch companies and a Luxembourg company, which is then owned by a US company.

Mr Gallagher : Ultimately a US company. In between the two I do not have insight into that.

CHAIR: We will get to that. I just want to run these figures past you, Mr George. I know there are different ways of calculating these figures. You may have figures that are slightly different from the figures I have. Can you tell me, for the purpose of the broad discussion, whether these are roughly correct. Pfizer had revenue last year—year ending 31 December 2014, this is according to your public documents—of roughly $1.2 billion.

Mr Gallagher : Just short of $1.2 billion, yes.

CHAIR: The figure I have is $1.21 billion. You received PBS funding of $738 million.

Mr Gallagher : About 54 per cent of all our revenue is from PBS and medicines.

CHAIR: I have got the year ending June 2014 figure, $738 million. That is from the PBS published information. But you are saying roughly ballpark—

Mr Gallagher : There might be a slight difference between my 54 per cent and the 730 because some of those are list price versus net revenue received. There might be some variation because of that.

CHAIR: Sure. The income tax you paid year ending 31 December last year was $21 million?

Mr Gallagher : That is correct.

CHAIR: Let's not pussyfoot around this. Let's get to the nub of it. According to your figures, you have a company which has sales of $1.2 billion, you get something in the vicinity of $700 million of taxpayers' funds and yet your final tax bill was only $21 million. You are saying your taxable profit you have out of that is about $80 million?

Mr Gallagher : After exceptional items, our taxable profit was $51 million or $52 million in 2014, of which we then paid $21 million tax, yes.

CHAIR: You know where we are going to go with this, so let's get to it. The allegation, and I am not the first one to make this about your company, is that you have arranged your affairs in such a way to minimise your tax obligation in this country, that you have artificially made your company less profitable in Australia and made your holding companies and other companies more profitable in places like Luxembourg to minimise the tax obligations you have. That a company such as yours, the size of yours and the nature of yours could have such a small amount of profit is the issue. According to your own figures, Mr Gallagher, Pfizer is not a very profitable company—

Mr Gallagher : In Australia.

CHAIR: In Australia. I am going to put to you the allegation, so you can respond, that this is an artificial arrangement created to minimise your tax obligations in this country.

Mr Gallagher : We manage our affairs here fully compliant with all laws and regulations. We effectively book the sales here as revenue. We then take our costs et cetera off that. We generate our accounting profit, which is $51 million, I think, in 2014, upon which we pay our income tax. If you look at our core activities, effectively we are a distributor of medicines in this market and the margin we are getting on that is about five per cent, which seems to be broadly about the average distribution margin. I think we get the appropriate reward for the activities we undertake in this market.

CHAIR: $1.2 billion in sales. Where does that go?

Mr Gallagher : We obviously have got different lines on the P&L. You have got your cost of goods and then you have got your expenses.

CHAIR: Let's talk about that. That is an important figure. On the cost of sales, what per cent of that $1.2 billion is cost of sales?

Mr Gallagher : I think it is 72 per cent.

CHAIR: What is it in the US?

Mr Gallagher : From the media articles, I think, in the order of 20 per cent.

CHAIR: So it costs you 3½ times more than the US for your cost of sales here in Australia? That is not a very good record for a CEO.

Mr Gallagher : I do not think you can compare across the two because there are different items on the P&Ls that are treated differently. If you look at our revenue, we have a lower price received in most cases for most medicines. We have price disclosure cycles. On the revenue line, we have a very different revenue picture. On the cost of sales, we follow the appropriate OECD arms-length principles.

CHAIR: Let's be clear about what we are here to discuss today. There is a big difference between tax minimisation and tax avoidance. The allegations that we are asking you about today are not that you have engaged in tax avoidance and not that you have engaged in behaviour that is illegal; it is asking questions about the current Australian framework, the laws, and the international framework allow for certain activity. We are not disputing the legality of your structures; we are disputing perhaps the morality of some of these structures that have been created in a way to minimise your tax obligations. Last year, somewhere between 70 and 75 per cent is your cost of sales?

Mr Gallagher : I think it was 72 per cent.

CHAIR: Where does that money go when there are $1.2 billion of sales in Australia? Does it go to Luxembourg?

Mr Gallagher : No. We procure the product from various locations around the world and the price that is paid for those goes to those locations. In our case, there are a single source supplies across the world in different locations—mostly Pfizer locations; some are third parties.

CHAIR: Where? Can we run through a couple of drugs with you, and you can tell me where these come from?

Mr Gallagher : I might not know them all, but I will try.

CHAIR: Viagra? Sorry—it is a bit early in the morning to be talking about Viagra.

Mr Gallagher : I think Viagra is Ireland primarily but I would have to clarify that. I could not confirm for sure. I am pretty sure it is Ireland. Senator, perhaps I can help you: of 90 per cent of our medicines, 67 per cent come from Ireland; I think 14 per cent or 15 per cent from Singapore; and eight per cent from Spain; the other 10 per cent come from various sources.

CHAIR: That is where they are made?

Mr Gallagher : Yes.

CHAIR: You are saying that the bulk of the drugs—that is perhaps the Irish connection.

Mr Gallagher : As it happens, that is a coincidence.

CHAIR: I was asking the question about whether your parent company was in Ireland, not you being Irish; that is a coincidence. Can you give me that figure again? These are obviously very rough figures.

Mr Gallagher : Maybe we have the exact figure, just for the record.

Mr George : 67 per cent comes from Ireland; 15 per cent comes from Singapore.

Senator XENOPHON: Of value?

Mr George : Yes.

Senator XENOPHON: Who determines value?

CHAIR: That is the question. So, 67 per cent goes to Ireland?

Mr George : 15 per cent from Singapore; eight per cent from Spain; and 10 per cent from a variety of other markets, including the US.

Mr Gallagher : Of which, some would be third-party manufacturers as well.

CHAIR: Of Pfizer's $740 million you get from the public through the PBS, would you have a breakdown of roughly what are the largest—the figure depending on when you count your year ending—drugs are? Is the largest Depo Provera?

Mr Gallagher : No, it would not be; that would be quite small.

CHAIR: What would the largest be?

Mr Gallagher : We have a very wide and broad array of medicine. The single largest is probably Enbrel for rheumatoid arthritis.

CHAIR: That is the largest on the PBS?

Mr Gallagher : I think that is our largest on the PBS, yes.

CHAIR: Can I ask you other guys: what would be your largest on the PBS?

Mr Sharkey : In 2014 it would have been Nexium.

CHAIR: Sorry, I am not familiar with that.

Mr Sharkey : Nexium is esomeprazole and it is in the ballpark of $119 million.

Mr McDonald : For us, it would be Seretide, which is a respiratory medication for asthma.

CHAIR: How much—would you have a ballpark? I know these things vary from year to year.

Mr McDonald : It would be approximately $150 million on the PBS, I think.

CHAIR: Mr Gallagher, this is the fundamental question. You are saying that you make the sales, you book the sales here as revenue—that is how you get to $1.2 billion in revenue—and then you pay your supplier in Ireland, correct?

Mr Gallagher : Correct.

CHAIR: So what is the whole point of having a—I do not quite understand why you have a Dutch—double-dutch—Luxembourg holding operation. What purpose is that serving for you?

Mr Gallagher : I think it is very common for international companies to have holding companies outside their home jurisdiction. Ours happens to be in the Netherlands and in Luxembourg. That is where we held from through Australia—

CHAIR: Why?

Senator XENOPHON: Why Luxembourg?

CHAIR: Why Luxembourg?

Mr Gallagher : It is the corporate structure that is devised. In my role locally, that is not really of my choosing or my calling. We manage the local business.

CHAIR: Take a punt. Why do you reckon you are in Luxembourg?

Mr Gallagher : I do not know.

CHAIR: You have no reason or understanding as to why Pfizer would be held there, the company that you are the—are you the managing director or the CEO?

Mr Gallagher : CEO and managing director.

CHAIR: You are both. They must pay you very well. You have no reason or understanding as to why the company that you are managing director and CEO of is held in Luxembourg? You do not know why it is held in Luxembourg?

Mr Gallagher : Again, just for clarity, I think Tony said that there are three shareholders, of whom 90 per cent is the Netherlands and 10 per cent is Luxembourg.

CHAIR: But your $1.2 billion in sales—what percentage of that? You are saying 75 per cent of that is for your cost of sales and the bulk of that 75 per cent of that goes to Ireland—or half of the 60 or whatever per cent. 67 per cent of your 75 per cent, of your $1.2 billion goes to Ireland.

Mr Gallagher : Goes to the manufacturing locations.

CHAIR: So if I was going to do a very rough calculation, I would be saying that you are looking at somewhere in the vicinity of $600 million going to Ireland.

Mr Gallagher : I do not know for sure. Again the number you mentioned of PBS is probably a list price; it would be for different nets. For percentages, you are correct.

CHAIR: I am saying: if you are doing 75 per cent of 1.2, and then two-thirds of that, you are looking at around that figure. That is what is going to Ireland. What goes to the Netherlands? Where does that go? I do not understand.

Mr Gallagher : I will ask Tony to clarify. That is our holding company.

CHAIR: I do not understand why you have this Luxembourg-Dutch operation seems to serve no purpose. I am sure it does have a purpose.

Mr George : The Luxembourg and the Netherlands operations are the holding companies. If we pay a dividend, which is after our tax-paid profits out of retained earnings, and they are normally fully franked dividends with no withholding tax, we pay any dividends—which is money left over at the end of the day—up to our holding companies, who are our shareholders basically.

CHAIR: And then your Irish company, where you are paying to in Ireland, is that held in the Netherlands as well?

Mr Gallagher : I do not have that information. I do not know.

CHAIR: Oh, come on.

Mr Gallagher : I do not know.

CHAIR: Did you used to work for the Irish company?

Mr Gallagher : I worked for the local affiliate in Ireland.

CHAIR: Do you know who held them?

Mr Gallagher : I would have to check. Again, it is probably a holding company based in the Netherlands.

CHAIR: This is fantastic. There are two Netherlands and a Luxembourg company that own Pfizer Australia—is it called Pfizer Australia?

Mr Gallagher : Pfizer Australia Holdings.

CHAIR: So they are called Pfizer Australia Holdings?

Mr George : No.

CHAIR: No. You are called Pfizer Australia Holdings. What is your holding company called?

Mr Gallagher : Here locally?

CHAIR: No, the international one. The one that owns you.

Mr George : I will give you the exact titles. One of the Netherlands entities is called Pfizer Global Holdings BV and the other is called Pfizer Australia Holdings BV—they are the two Netherlands companies.

CHAIR: Hang on, Pfizer Australia Holdings is a Netherlands company?

Mr George : No.

Mr Gallagher : No.

CHAIR: No.

Mr George : Let me explain. Pfizer Australia Holdings is a local holding company that owns two trading companies—

CHAIR: Which you work for—they pay your bills?

Mr George : They own the two trading companies: Pfizer Australia Pty Ltd, which is the company we work for, and they also own the shares in Pfizer Perth.

CHAIR: Yes.

Mr George : Pfizer Australia Holdings, as the local holding company, it owns investments in—

CHAIR: Is Pfizer International called Pfizer Global?

Mr Gallagher : Fundamentally, in the end, Pfizer Inc. would be the New York based company.

CHAIR: Yes, but there are issues about tax in the US, too. We can get to that. I am not sure that you will be able to answer, in fairness, Mr Gallagher, because that is outside the scope of your responsibility. Is your parent holding company Pfizer Global?

Mr George : The parent company of Pfizer Australia Holdings is not an Australian company. There are two Netherlands companies called Pfizer Global Holdings BV and Pfizer Australia Holdings BV.

CHAIR: So Pfizer Australia Holdings is a Dutch company? You said there are two—

Mr Gallagher : Let me go through it one more time, just for clarity.

Senator EDWARDS: How about you provide us with an indication of how your companies are held—who the shareholders are and where you believe the tax is paid? You do not have that in your submission. But otherwise you are going to try and educate four senators as to how you are structured. We can look at that afterwards; we still have the other witnesses here.

Mr Gallagher : We will do that and take it on notice. But there are taxes paid here, Senator.

Senator EDWARDS: Tax minimisation is a sport here; tax avoidance is a crime. We are looking at the ways in which—

Senator XENOPHON: I will underline the blur between the two.

Senator EDWARDS: We are just looking, and so is everybody else around the G20 nations, as to how that is fair.

Mr Gallagher : If I can just be clear, though. Again, we fully comply with all—

Senator EDWARDS: Nobody is suggesting that—Senator Dastyari has not and I am not suggesting it.

CHAIR: I just want to get one thing: the names of the companies. There are three companies or three shareholders, what are the names? There seems to be some Dutch company with a name of—

Senator XENOPHON: Pfizer Australia Holdings.

Mr George : It is a similar holding; it is a similar name. The Australian holding company is a company in Australia, Pfizer Australia Holdings Pty Ltd. The two companies in the Netherlands are called Pfizer Global Holdings BV and Pfizer Australia Holdings BV. The fact it is a BV means it is a Netherlands company.

CHAIR: What is it?

Mr George : BV.

Senator EDWARDS: Do they own separate classes of shares? Are they equal shareholders? How is the shareholding of Pfizer Australia held?

Mr George : They all own ordinary shares so they all have an equal class of share. The two Netherlands entities own 45 per cent each and the Luxembourg company owns 10 per cent.

CHAIR: What is the Luxembourg company called?

Mr George : Pfizer Shareholdings Intermediate SARL.

Senator EDWARDS: Why have you structured it that way?

Mr Gallagher : That is the corporate structure which our holding company falls into.

Senator EDWARDS: No; I get that—and that is the third time you have done that. Why have you structured it that 45 per cent are in those two companies, and why is there a Luxembourg one with a 10 per cent shareholding? Do not say to me, 'That is the corporate structure', because that is implicit.

Mr Gallagher : I think, Senator, in my role, and our role locally, we do not control how our holding company above us, our parentage, is managed or organised. We manage the in-market functions to the best of our ability and, in terms of, as directors—in my case, director—of an organisation, to ensure we manage that appropriately within all appropriate guidelines and laws.

Senator EDWARDS: I am trying to help. I am just trying to provide clarity. I just want some clarity as to why it is structured in Luxembourg. Is there a lower tax rate in Luxembourg? Is it that the other shareholders channel all the income into Luxembourg—this is the inference—because it has a lower tax rate than the other jurisdictions, either Australia or the Netherlands?

Mr Gallagher : The answer, Senator, is: in my role, I look at the local market. It is not an area that I can cast any light upon. I do not have any insight to that.

Senator EDWARDS: With all due respect, that is what we are interested in. If you cannot answer that, we are just going to keep going down this path. I would suspect that the other senators here will probably not be happy with that, but anyway.

CHAIR: Thank you. Senator Milne?

Senator MILNE: I appreciate your opening remarks about the contribution you make to the health of Australians. But I just want to clarify, at the start, your engagement in the last decade in pleading guilty to several criminal charges around the world. I will start off with you, GlaxoSmithKline. Is it true that in 2012 you settled for $3 billion the biggest healthcare fraud case in the United States, and that that was for mismarketing crimes, including promotion of drugs for unapproved uses, hiding data about the medications' risks, making big payments or offering lavish gifts such as all-expenses-paid vacations to doctors for dispensing products? Is that true?

Mr McDonald : It is true a settlement was reached in the US for $3 billion. It was for a number of different historical settlements rather than one. That is correct.

Senator MILNE: On the basis that that was as recent as 2012, does your company in Australia offer any incentives, gifts, remuneration, trips to people for selling or dispensing your drugs?

Mr McDonald : No, Senator, we do not. In fact GSK Australia's sales and marketing practices are aligned with Medicines Australia's code of conduct. We publicise on our website the money that we spend on doctor educational meetings and events. In fact, our sales and marketing practices are moving away from direct funding of doctors for educational events.

Senator MILNE: Thank you. I will move on to AstraZeneca. Same question: have you been involved in any criminal prosecutions in the last decade? If so, what for?

Mr Sharkey : In Australia, no. In relation to our overseas activities: I am a representative of the Australian business. I cannot talk about our overseas activities.

Senator MILNE: Do you know?

Mr Sharkey : No; I do not know.

Senator MILNE: Can you tell me: do you pay anything to people who sell or dispense your drugs in Australia? Do you provide any gifts, trips, incentives—anything of that kind?

Mr Sharkey : There are educational events that we do provide some funding for. They are disclosed on the Medicines Australia website. There are no activities that do not have an educational component associated with them.

Senator MILNE: What sort of educational component? Do they involve conferences in Paris?

Mr Sharkey : They could involve conferences. The American Society of Clinical Oncology conference in Chicago would be an example, where the latest data on clinical trials related to new oncology products would be disclosed for the first time.

Senator MILNE: And you would subsidise or pay for the trips of people to go there?

Mr Sharkey : In some circumstances we may subsidise the trip and, in return, there would be an obligation, when the healthcare provider is returning, to provide some education to other healthcare providers back in Australia.

Senator MILNE: Moving on to you, Pfizer, would you like to tell us about your 2009 criminal charges which, I understand, were resolved in a $2.3 billion settlement? It was illegal marketing of some drugs as well as giving kickbacks to doctors and other prescribers. Can you confirm that it was the company's fourth multimillion dollar settlement in less than a decade?

Mr Gallagher : I am not aware of all the details. If those are the facts you have in front of you I am not contesting them. But I do not have that information in front of me, so it is difficult to definitively do what you ask. Historically there have been some issues which we have moved from. We have now fully changed our procedures and are fully compliant in every way and do not tolerate any inappropriate behaviour from anybody within Pfizer.

Senator MILNE: So we are supposed to believe that, having had it happen four times in a decade—in this case, it was a multibillion dollar settlement for mispromoting drugs and kickbacks and the like—that has suddenly changed?

Mr Gallagher : As I say, we are very compliant. We have very strong internal policies and procedures. We do not tolerate any inappropriate behaviours. As with any large organisation, could there be individuals who are not according with that? It is possible. If that were the case, we would deal with that very severely.

Senator MILNE: And do you pay any incentives for people who dispense your drugs or sell your drugs?

Mr Gallagher : No, we do not pay incentives to anybody to sell or dispense our drugs.

Senator MILNE: Do you pay them any rewards? Do you give them anything?

Mr Gallagher : No, again, under the local code of practice, which we are a signatory to, there are no gifts allowed in Australia, so we provide no gifts. I think, as one of my colleagues mentioned, we do, on occasion, support healthcare professionals to go to international conferences in order that they are exposed to the most recent data for the benefit of patients.

Senator MILNE: Just on the issue of giving people overseas trips to conferences: is that detailed in your publicly available reports?

Mr Gallagher : Yes. The educational event reports are published on the Medicines Australia website, and our code of practice is signed off by the ACCC. In fact we are probably the only element of industry that produces such reports in an effort to be transparent, and, interestingly, it seems to be almost perceived as a negative.

Senator MILNE: Now I want to go to whether or not you are being audited by the tax office—and I will ask the three of you: can you just indicate whether the Australian tax office is auditing you?

Ms Geiger : We are not being audited at GlaxoSmithKline Australia. We do have a Stiefel entity that we purchased in 2009, and that has been under audit since we purchased it.

Senator MILNE: Which entity?

Ms Geiger : It is called Stiefel.

Senator MILNE: And that is being audited?

Ms Geiger : It is dermatological products. It is quite small. And it has been being audited since before we bought it and is still technically under audit.

Senator MILNE: What is it being audited for?

Ms Geiger : They are just looking at the general tax affairs.

CHAIR: Just to follow up on that: advanced pricing agreements—you have one?

Ms Geiger : Yes.

CHAIR: When does it run out?

Ms Geiger : It runs out 31 December 2016.

CHAIR: And that was a three-year agreement?

Ms Geiger : It was a five-year agreement.

CHAIR: And that is an across-the-board one for all of your products?

Ms Geiger : Yes. So that was for GSK Australia—

CHAIR: And when do you start the negotiation on the next one?

Ms Geiger : That would depend; probably in the next 12 months or so.

CHAIR: We will ask the tax office then.

Senator MILNE: Now I will come to AstraZeneca Australia. Are you being audited by the tax office?

Mr Sharkey : No, we are not.

Senator MILNE: Pfizer, are you being audited by the tax office?

Mr Gallagher : No, we are not.

CHAIR: Could I just quickly ask a question: your advanced price agreement—when does it run out?

Mr Sharkey : AstraZeneca Australia does not have an advanced pricing agreement. We did have a review by the Australian Taxation Office in 2010 when they found that we were a lower-risk taxpayer for the purposes of income tax and GST. They considered that our documentation was of a medium to high quality. So we do not have an advanced pricing agreement but we have had a review by the Australian Taxation Office.

CHAIR: In 2010?

Mr Sharkey : In 2010. And in 2013, I believe, they advised us that they categorised us as a lower risk taxpayer again.

CHAIR: Mr Gallagher, I will ask you the same question.

Senator MILNE: We might as well have the same question here now in terms of advance pricing agreements.

Mr Gallagher : I am going to ask Tony, who manages those issues day to day.

Mr George : We do not have an advance pricing agreement with Pfizer Australia either.

Senator MILNE: Now I want to come back to any ASIC exemptions you might have in terms of your financial reporting. One of the frustrations is that people cannot get hold of your full annual financial reports for the past 10 years. Can you tell me, in each case, whether you have an ASIC exemption so that you only have to provide consolidated financial reports? If that is the case, would you now provide on notice to the committee the past 10 years of annual financial reports so we can actually have a look at this? I would like to know in the three cases whether you have any ASIC exemption because the structure of ownership does not force you to make the same level of disclosure in Australia that other corporations do.

Mr McDonald : I do not believe we do have an exemption.

Ms Geiger : I do not believe we have an exemption.

Mr McDonald : No. We do not have any exemptions.

Mr George : We have an ASIC class order that allows us to prepare consolidated accounts for the local entity, so we only prepare one set of accounts for Pfizer Australia Holdings, and that includes its operating subsidiaries.

Senator MILNE: My point is that, in order for people to have a really good look at this, we would like to have more information than that. Are you prepared to take that on notice, please? According to some investigations reported in the media, it is asserted that Pfizer uses capital stripping. In particular, there is an example of $733 million in share capital created through an interparty trade from Australia to the Netherlands. It was well above the book value of $231 million, and the only intangible asset that emerged was a product development right valued at $461 million. Can you break down for me what this product development right, valued at $461 million, was for?

Mr Gallagher : Yes, we can. There were some misinterpretations of that information in the media. Tony, you might take us through the detail.

Mr George : This relates to the global transaction when Pfizer Inc. acquired Wyeth globally. In Australia, Wyeth also had a very large operation that Pfizer Australia acquired as a result of the global acquisition. We had to basically buy the local operations of Wyeth Australia. Locally we purchased the Wyeth group for $670 million. That was based on an independent valuation at that time. The developed product rights that arose, which were actually $427 million, again were part of that independent valuation. These developed product rights actually represent the value of the future profits we would derive from the Wyeth acquisition. They are recognised under normal Australian accounting standards. The accounts for those years were audited without qualification. Also, our tax review that occurred in 2013 covered the years 2009 to 2011, which included this transaction, and there were no issues raised from that tax review questioning the way we have treated these developed product rights.

Senator MILNE: So you reject the notion that you have been involved, effectively, in capital stripping?

Mr Gallagher : We undertook appropriate accounting of the assets at the time, and then later on they had less value and they were written down, effectively.

Senator MILNE: Isn't this something that is pretty systemic in the way that you treat your Australian business?

Mr Gallagher : As Tony outlined, at the time of the acquisition of Wyeth, that was the independent valuation of those assets. So in many ways we have no option. They got independent valuation, and that was the value put upon them.

Senator MILNE: It must be a shocking thing to be running a business in Australia that is 350 per cent more to sell your drugs in Australia, and your assets are being written down and your business is getting smaller and smaller over time. It must be a struggle!

Mr Gallagher : It is difficult, frankly. Our revenue is declining over time.

Senator XENOPHON: She was being sarcastic.

Mr Gallagher : Thank you, but I—

CHAIR: I was not aware that pharma was an unprofitable business to be in.

Mr Gallagher : We do make a profit, we do pay our tax, but I think our revenue has been declining through price cuts, through loss of exclusivities, and it is quite difficult actually.

Senator MILNE: Isn't this going against the growth trajectory that is apparent in all the figures the chair read out earlier that you have a situation where you are a highly profitable company in Australia but because of the tax structures you have worked out you minimise your tax and maximise your take from the Australian taxpayer through the PBS? Aren't we being ripped off by your company?

Mr Gallagher : We sell our medicines at the price—the reimbursed price, in many cases—approved by the government. We then take our costs off that. We make our profit and we pay our income tax upon that profit. Our revenue is declining, through a number of factors, such as price cuts and the price disclosure cycle—the most recent announcement and the most recent legislation about further price cuts. We have lost exclusivity on a number of medicines and we have had to try to win some tenders at lower margins, so our revenue is declining. We book all our revenue here, but our revenue is declining and has been for a number of years.

Senator EDWARDS: That still does not address the cost of goods sold. It still does not address that you have a 3½-

Senator MILNE: No—3½ times more than any—I mean, that is a ridiculous proposition, that it costs 3½ times more in Australia to sell than in the US. That does not make sense.

Mr Gallagher : We effectively buy product in and we distribute here in the local market, and we make our margin on that and pay appropriate—

Senator MILNE: That is right, but what do you buy it in for, from your own company? That is the issue, isn't it?

Mr Gallagher : We buy in at the transfer price.

Senator MILNE: That is right, and how reasonable is the transfer price, given that it is exactly the same mechanism used by a whole lot of other multinational corporations—to sell from one of their entities to another entity at a higher price to minimise the change in the tax arrangements between various countries?

Mr Gallagher : We follow, as I said before, all appropriate regulations, all laws. We follow the OECD arms-length principles, which is how we come to that position.

CHAIR: Before we go to Senator Xenophon, perhaps we could re-read what was said in the tax submission, and he will have comments on this again:

The sale happens here in Australia and then the attempt is made to back the profit out through pricing or royalties.

Senator XENOPHON: Perhaps I could just ask Mr McDonald: how much of GSK's revenue goes off to other countries of the total revenue of almost $1 billion for the earnings of 31 December 2014? How much of that is sent to other subsidiaries, other entities overseas?

Mr McDonald : GSK Australia is owned by a company in the UK, a holding company. That is the only owner.

Senator XENOPHON: Where in the UK is that holding company?

Senator EDWARDS: It is not a holding company; it is the parent company, isn't it?

Mr McDonald : Yes.

Senator XENOPHON: So, the money only goes to the parent company, but then the parent company is free to send that revenue or profits anywhere else.

Senator EDWARDS: You pay tax in the UK.

Ms Geiger : Yes. It depends on the supply chain. Would you like me to give you an example?

Senator XENOPHON: Not yet, unless you think it is relevant to the question that was asked.

Ms Geiger : Well, I do, because I think that is how the profits—

Senator XENOPHON: Sure.

Ms Geiger : We sell Seretide here. We own the intellectual property for that in the UK. We manufacture the API for the ingredient in Scotland and we manufacture it in Singapore. So we have a manufacturing return in Scotland and Singapore. Then, once we have the API, we effectively transfer and we make the actual product—the inhaler—in Ware in the UK, so there is profit that is taxable there again in the UK. Then it comes to Australia, and effectively in Australia it is then sold to customers. So the profit in our supply chain is either in Australia, under the APA for what is done in Australia, or there is manufacturing return in Singapore or in the UK. And then there is intellectual property return in the UK.

Senator XENOPHON: The reason I ask that question in terms of the UK is that the BBC's Panorama program back in May 2012, just over three years ago, undertook an expose, for want of a better word—that GSK was offshoring funds to Luxembourg to avoid the then 28 per cent UK corporate tax rate back in 2010. The Luxembourg subsidiary lent 6.34 billion pounds to GSK in the UK and paid interest of I think 134 million pounds, which wiped out its UK profits. I am just trying to work out whether in an indirect way revenues from GSK here in Australia end up in the UK and then end up in Luxembourg, where there is tax minimisation. In the context of Luxembourg, we know from the 'Lux Leaks' scandal last year that something like 340 multinationals have entered tax agreements with the government of Luxembourg to pay tax at as little as one per cent. I am sure a lot of taxpayers who are listening to or observing this inquiry would love to pay just one per cent tax.

Ms Geiger : We did have a financing structure in Luxembourg. We no longer have a financing structure in Luxembourg. That company is historic and has been liquidated. The supply chain is as I described it.

Senator XENOPHON: Is it still going—

Ms Geiger : No, it is liquidated; it is gone.

Senator EDWARDS: Yes, but who owned it?

Ms Geiger : Who owned the Luxembourg company?

Senator EDWARDS: Yes.

Ms Geiger : The UK would have owned the Luxembourg company.

Senator EDWARDS: So, your parent company owned a company in Luxembourg, and the company in Luxembourg had $6.3 billion worth of money lying around, so it lent it to the UK division and charged it about the same amount in interest as your profits were?

Ms Geiger : Historically we did have a Luxembourg structure, but we do not have it—

Senator EDWARDS: It goes to the culture of it, though, doesn't it.

Senator XENOPHON: So, you got rid of that arrangement in Luxembourg.

Ms Geiger : Yes.

Senator XENOPHON: Do you have arrangements in other countries that have lower tax rates—the Cayman Islands, the Bahamas, and other exotic locations?

Ms Geiger : No. We have a policy that we have published on our website. We have published that since 2012 and recently updated it, in 2014, and I attached it to the submission. We do not use tax havens.

Senator XENOPHON: It is good to hear that. Mr Sharkey, in terms of AstraZeneca, your global CEO, Pascal Soriot, attacked Pfizer back in 2014. He warned that AstraZeneca would be damaged by Pfizer's tax avoidance plans. That was in the context of a pretty bitter takeover deal—I think about $140 billion—which did not go ahead. Do you endorse those comments of your global CEO about Pfizer's tax avoidance strategies?

Mr Sharkey : I do not have any information about that. The comments were made in a global context and in the context of a hostile acquisition.

CHAIR: You are not prepared to say whether he was right or wrong?

Mr Sharkey : I do not have any information to provide an answer in relation to that.

Senator XENOPHON: You do not agree with your global CEO about Pfizer?

Mr Sharkey : Well, I do not have the information that my global CEO had available. I cannot form a view on it.

Senator XENOPHON: Perhaps I can just clarify: in terms of overseas arrangements, does AstraZeneca have any arrangements, any funds that are sent to Luxembourg, Ireland—countries that have a lower tax rate than Australia's?

Mr Sharkey : There are two arms to our business in Australia. There is the distribution arm, which is about two-thirds of our revenue, and there is the manufacturing arm, which is about one-third of our revenue. In relation to the distribution arm, we source our products from four countries. The countries are the United Kingdom, France, Sweden and the Netherlands. They are the only four countries from which we source our goods in Australia.

Senator XENOPHON: But are there countries where revenue is sent directly or indirectly which have a much lower tax rate than Australia?

Mr Sharkey : In relation to revenue from Australia—

Senator XENOPHON: It goes off to other companies, correct—overseas? Those companies have arrangements with, say, the Cayman Islands or Luxembourg. Is there a holding company or a subsidiary of AstraZeneca in Luxembourg?

Mr Sharkey : For AstraZeneca Australia there is no subsidiary—

Senator XENOPHON: No, not Australia—AstraZeneca full stop.

Mr Sharkey : Our ultimate parent is AstraZeneca PLC in the United Kingdom, but in relation to our Australian operations all I can speak to—

Senator XENOPHON: No, I did not ask that. Does AstraZeneca have a presence in Luxembourg?

Mr Sharkey : I do not know. I cannot answer that.

Senator XENOPHON: Can you take that on notice?

Mr Sharkey : Yes, I would be pleased to do that.

Senator EDWARDS: How does your distribution arm go at negotiating rates for your goods coming into Australia compared with other countries' distribution companies?

Mr Sharkey : In relation to Australia, we follow the OECD guidelines. We are setting a transfer price that would provide effectively the same price as if we were able to buy the goods from an independent third party. They are trying to arrive at a price—

Senator EDWARDS: For the same goods into Australia—and I am not familiar with all of your products—what is the biggest product?

Mr Sharkey : The biggest product is Nexium.

Senator EDWARDS: How does your head of that distribution company go negotiating a good buy-in price for that, when compared with the same fellow in the US?

Mr Sharkey : I cannot speak of the US, but in relation to Australia we look for an arm's length return, an objective return—

Senator EDWARDS: Yeah, you are boiler-plating me. Okay. Does it cost 3½ times more for that same product in this jurisdiction than it does in another jurisdiction?

Mr Sharkey : I think the Commissioner of Taxation brought up in this inquiry that in the United States, for example, it usually costs up to four or five times more for products. That is not the case all of the time. But in relation to Nexium, I believe that the price is higher in the United States—if we are talking about the price in-market.

Senator XENOPHON: Mr Gallagher, regarding Pfizer, you have two companies with the same name: Pfizer Australia Holdings BV and Pfizer Australia Holdings Pty Ltd. One is Dutch and one is Australian. Do you think that causes any confusion out there that you have two companies with identical names but they are completely different entities at law, aren't they?

Mr Gallagher : They are different entities. Pfizer Australia Holdings Pty Ltd is the Australian company and the other one is part of the Dutch holding company.

Senator XENOPHON: So you do not see any confusion from a corporate perspective. How much of Pfizer's revenue is sent offshore?

Mr Gallagher : We book all of our revenue here.

Senator XENOPHON: But what about sending it offshore?

Mr Gallagher : It depends where we purchased the product from. Going back to the question about where we purchase our product from: it is different countries. We answered that in terms of Ireland, Singapore—

Senator XENOPHON: Can you assure the committee that the amount you pay for product is the same as the other five subsidiaries? Is there a common rate for the product that you pay, or does it vary from country to country?

Mr Gallagher : It is not within my scope. I do not know the answer.

Senator XENOPHON: But that is kind of important, isn't it? It is important to know that if you are paying a certain price here for a certain drug but another Pfizer in the Pfizer family is paying a much different rate. That would of course have implications in terms of the rate of tax you would be paying in that country and indeed in this country?

Mr Gallagher : We follow the appropriate policies and procedures. I do not have that oversight into the other markets. All I have knowledge of is the market I operate in, which is here in Australia.

Senator XENOPHON: Could you take on notice how much Pfizer pays for drugs in other countries, compared to what Pfizer pays for drugs in this country.

Mr Gallagher : I will take it on notice.

Senator XENOPHON: And if we could have it in the various jurisdictions and key jurisdictions.

Senator EDWARDS: Do you travel internationally and meet with the parent company at all.

Mr Gallagher : A bit. Not too much, thankfully.

Senator EDWARDS: Do you communicate with the company as the head of your company here?

Mr Gallagher : Yes, I do.

Senator EDWARDS: And do you have peers around. You are not the only CEO in a country that you distribute drugs into. Is there an American one, a South-East Asian one and—

Mr Gallagher : Yes, there would be.

Senator EDWARDS: Do you ever talk to them?

Mr Gallagher : I do.

Senator EDWARDS: About golf, or do you talk to them about how much they pay for their drugs in their country?

Mr Gallagher : I do not play golf. We do meet and discuss our business. We usually discuss the market we operate in, in terms of the therapy areas, how we are doing, what is going well and what is not going so well.

Senator EDWARDS: So you don't ever ask them how much you are paying for that drug into their country?

Mr Gallagher : No, we don't actually.

Senator EDWARDS: Do you reckon the heads of Coca Cola in-country operations ever have a discussion about those types of things?

Mr Gallagher : I cannot speculate. I do not know.

Senator XENOPHON: To your knowledge, would there be any documents or emails that exist that would give a comparison of what Pfizer pays for drugs in different countries.

Mr Gallagher : I have never seen such a thing, so, not to my knowledge.

Senator XENOPHON: Could you ask whether there is a comparison. There might be a table. That might save you time in regard to the information we have requested from you.

Senator EDWARDS: When they sent you to the old colony they cut you off from communications from all the other parts of the world. You do not know what is going on in any other jurisdiction.

Senator XENOPHON: I don't think Australia is a colony of Ireland!

CHAIR: What is the largest drug you have on the PBS?

Mr Gallagher : Enbrel.

CHAIR: What roughly did that generate in sales in the PBS?

Mr Gallagher : Depending on the year, just over $100 million.

CHAIR: Is that a drug that is made in Ireland?

Mr Gallagher : I would need to clarify it, but I am pretty sure it is Irish.

CHAIR: It does not matter where it is. You have an agreement with your Irish supplier, which is another Pfizer company, to produce that drug for you. You pay them a price for that drug. You are also saying that you are getting the best possible deal and that there is not some kind of internal arrangement to increase the price to make your company's Australian books appear artificially less profitable, for tax purposes. But at the same time you are saying that you have no idea what every other Pfizer company around the world is paying for that same drug?

Mr Gallagher : Correct, I do not—

CHAIR: So how do you know you are getting a good deal.

Mr Gallagher: We follow the appropriate policies and procedures—the arm's length principles—and try to manage the business locally.

CHAIR: But as the CEO of this company you do not ask, 'Perhaps if the Americans are paying a third what I am paying maybe I am getting ripped off here.'

Mr Gallagher: We follow the procedures and policies and we manage the local business to the best of our ability.

CHAIR: Mr McDonald, GSK had sales revenue last year of just under a billion dollars. Is that correct? I have $951 million. Is that ballpark, depending on what year you are in?

Mr McDonald: The $950 million was the cost of goods and the sales were $1.3 billion.

CHAIR: From the PBS and Australian taxpayers you received sales of $300 million?

Mr McDonald: That is about right.

CHAIR: How much tax did you pay last year?

Mr McDonald: We paid AUD $9.5 million in tax.

CHAIR: I have here the information on income tax expenses. I have here $1.5 million. That is incorrect?

Mr McDonald: That is incorrect.

CHAIR: I have the year-ending 31 December.

Ms Geiger: I think you have 2014. That is the tax by the accounts. So that is the tax from the accounts. 1.5 is just for the pharma. Then there is $3 million. So tax to the accounts is actually $4.5 million.

CHAIR: For your pharma figures I have 1.5. Is that where the 950 is coming from, as well?

Ms Geiger: Exactly.

Mr McDonald: 950 is overall.

CHAIR: You are saying that all up you paid $10 million in tax last year?

Ms Geiger: Yes, because the 1.5 is an accounting charge. So that is accounting expenses—

CHAIR: Of $1.3 billion in sales?

Mr McDonald: Yes, in total.

CHAIR: Which is less than one per cent on revenue.

Senator EDWARDS: No, that is turnover.

Mr McDonald: That is turnover, that is right.

Senator EDWARDS: Let's not get that confused again. They pay tax on net profit.

CHAIR: Mr Sharkey, what was AstraZeneca's revenue on sales last year?

Mr Sharkey: Revenue was $1.052 billion.

CHAIR: How much did you receive from the taxpayer in terms of PBS?

Mr Sharkey: PBS was approximately $650 million.

CHAIR: How much tax did you pay last year?

Mr Sharkey: Last year we paid approximately $23 million in tax.

CHAIR: So $10 million, $20 million and $20 million, roughly. There is $50 million in tax at the table, based on a PBS payment from the Australian public of roughly $2 billion, with $4 billion in sales and $50 million in tax on that. You can understand what the concern here is when we are sitting here getting this evidence and the claim is that this is a fair representation of the profitability of these companies, when, Mr Gallagher, you say yourself that you do not know what everyone else is paying for their drugs. I want to put to Mr McDonald and Mr Sharkey the same question I put to Mr Gallagher. I will put it to you first, Mr Sharkey. Do you know what your overseas counterparts are paying for the same drugs you are purchasing?

Mr Sharkey: No, I do not.

CHAIR: And Mr McDonald?

Mr McDonald: No, I do not, either.

CHAIR: The CEOs of three of Australia's largest pharmaceutical companies—in fairness, not necessarily CEOs—have no idea what these drugs cost to purchase in different jurisdictions? The three of you cannot tell us here today that your companies are not charging Australians, through the PBS and through the public, more than they are paying for the exact same drugs in different countries? You cannot even tell us whether we are getting ripped off, because you do not know what everyone else is paying for them?

Mr McDonald: I can say that I think Australia is paying very fair prices. The PBS is a—

CHAIR: But you do not know what everyone else is paying. You do not know what your other companies are paying in other jurisdictions. How can you say it is fair if you do not know what they are paying?

Mr McDonald: I do not know.

Mr Sharkey: There are two separate concepts in there. One is the price for the medicine that the Commonwealth pays—the sale and purchase price between us and the Commonwealth. The other is the transfer price. In relation to the transfer prices I do not know what the transfer prices are.

Mr Gallagher: As I said earlier, I do not have that information. It is not within the scope of my responsibility—

CHAIR: It must be great being a CEO of a pharma company; you don't need to know all that much.

Senator EDWARDS: I am going to come to your defence a little bit here. There is an inference that PBS payments from the taxpayers and everything like that is a bonus. It forms part of your total revenue, which is reported. Then your revenue is made up of the payments that are ultimately made by the public. Regarding the suggestion that you have billion dollar plus turnovers and things like that, and that your profits are quite low, we will put that aside. Your income is your income, but if you were looking at a jurisdiction to go into, it is quite risky to be here in Australia with such very, very, very low rates of profitability. Why would you bother with those levels of profitability on those levels of sales? You have quite a lot of exposure here for not a lot of return, it would seem. Would you like to comment on that, Mr McDonald?

Mr McDonald: As Mr Gallagher said, I think it is increasingly a challenging and difficult environment for us—the pressure on pricing for our medicines.

Senator EDWARDS: So your margins are being eroded by parent companies charging you more for the cost of goods. Is that where your cost pressures are in your business?

Mr McDonald: The margins for us are agreed in our advance pricing agreement. So we have that fixed. That is agreed. The ratios are agreed with the Australian Taxation Office. So if there are any price cuts or changes that is pressure we would wear.

Senator EDWARDS: Mr Sharkey, are you under some pressure in your business here? With all the exposure you have to Australia, is it worth staying here in this country for such low levels of profitability.

Mr Sharkey: Our primary purpose is to bring medicines here for the Australian people, but in terms of the—

Senator EDWARDS: Come on. We have moved on from the boiler-plate.

Mr Sharkey: We make an acceptable level of profit, based on the nature of the operation. We are effectively a distribution business here. So the risk—

Senator EDWARDS: So how do you measure your performance in your company if it is not on profit here in Australia?

How is your KPI as a CEO measured in this country if it is not by trying to get whatever profit you have made this year and turning it into a profit that is double that the next year or the year after or the year after that, because that is the pressure on Australian companies that are domiciled in this country? That is how they are judged by shareholders in equity markets in this country.

Mr Sharkey : We have a number of metrics including getting products registered at the Therapeutic Goods Administration, getting products reimbursed and on the overall sale of the products. The point I would make is that, in relation to the price which is set here, because our operation would be categorised as a low-risk distribution business, we would not expect to make the same level of profit, for example, as where our research and development occurs.

Senator EDWARDS: You are low risk, so that justifies the enormous expense you have in your company for the very, very low return you receive, which you repatriate to your parent company?

Mr Sharkey : Our cost of goods is effectively determined in accordance the OECD guidelines. So we set it based on an objective metric in a transparent way. It is done effectively to generate an arms-length return in a way that could be assessed by the Australian Taxation Office, if they were to conduct a review, and it takes into account—

Senator EDWARDS: Yes. I understand you are all good corporate citizens. Nobody is suggesting otherwise and we have all prefaced that. I am just asking: is the system fair? I am looking at what drives business culture in this country, which is profitability and paying taxes and everything like that, and what drives profitability in your country. This is a G20 problem—we all know that. Senator Milne, you want a follow-up?

Senator MILNE: Yes, I want to follow-up on one of your questions with regard to performance indicators for you. As a subsidiary of a multinational, do you have a KPI or are you are awarded on the level of profit you funnel offshore to the parent company or to the holding companies in the Netherlands or Luxembourg? Do you have a KPI separate from your Australian entity as to how you perform relative to the entity that owns you?

Mr McDonald : We do not have a KPI on that, no.

Mr Sharkey : No.

Mr Gallagher : No.

Senator MILNE: So there is no analysis for you as to how the business is doing here in terms of feeding into the global profitability, no measurement of that, no analysis of that, no reward for that?

Mr McDonald : We have a regional target which we work to, which is an international group of companies.

Senator MILNE: Now we are getting somewhere. So you have a regional target, which would relate to your performance review?

Mr McDonald : Yes, of a group of countries.

Senator MILNE: Thank you, and a regional target or a—

Mr Sharkey : We have local targets.

Senator MILNE: Only Australian targets?

Mr Sharkey : Australia and in some cases Australia and New Zealand.

Senator MILNE: But not regional beyond Australia and New Zealand? What about Pfizer?

Mr Gallagher : We are making metrics of the local performance of the business, including profitability.

Senator MILNE: And profitability where?

Mr Gallagher : Here.

Senator MILNE: So you do not have any assessment in relation to your performance with regard to the multinational who owns you?

Mr Gallagher : No.

Senator MILNE: Nothing?

Mr Gallagher : No.

Senator MILNE: What region are we talking about for Glaxo?

Mr McDonald : It is a large group of international companies, so that excludes Europe and the United States, which are basically the countries which I report up through and which forms a structural group within the organisation.

Senator MILNE: So when you take on these positions here in Australia, what discussions are had with your parent company with regard to what your performance objective is with regard to them?

Mr McDonald : We have an annual business planning process and we get set an annual target for Australia as part of that group.

Senator MILNE: And what about the other two?

Mr Sharkey : We have an annual target which is set in relation to Australia and New Zealand.

Senator MILNE: By the parent company?

Mr Sharkey : It is done in a consultative way but ultimately, yes, by the parent company.

Mr Gallagher : It is exactly the same—among other KPIs, so it is just engagement ensuring me manage all the businesses appropriately in every other way. That is the way it is set.

Senator MILNE: Do you see yourselves as an Australian business or do you see yourselves as the Australian arm of the multinational for which you work and which may transfer you at any time?

Mr Gallagher : I think we see ourselves as a local Australian business, bringing the products to the market in Australia.

Senator EDWARDS: What is the biggest pressure on profitability in your business right now, Mr Gallagher?

Mr Gallagher : There are two major pressures. The first is declining revenue through price cuts and other elements of the business, which is quite difficult right now; and the second is trying to manage our cost base.

Senator EDWARDS: Okay, but your cost base is 3½ times more than it is for the US.

Mr Gallagher : We have other costs. We have sales and marketing costs, we have general administrative costs—

Senator EDWARDS: So does the US.

Mr Gallagher : Yes.

Senator EDWARDS: So (a) you cannot negotiate a very good price for your product into this country and (b) you are asserting that your sales and marketing teams are not competitive with global benchmarks, which you do not seem to know about.

Mr Gallagher : No, I did not assert that, I do not think. I said we manage those costs. It was not suggesting that we are any less competitive. But, if you look at our accounts for 2013-14, you see a very significant decline in our marketing and sales costs. We had to restructure our business and reduce our headcount.

Senator EDWARDS: Okay. So you really do not get any scrutiny from offshore at all. To your parent company, everything you are doing here is pretty much tickety-boo. You are marginal, from the point of view of your turnover compared to your profit, but you get no scrutiny from any higher level?

Mr Gallagher : No, we are heavily measured, as I think I answered the previous senator's question. We look at our revenue, our profitability, how we manage our costs, how we manage our employees in terms of engagement, how we manage everything in the business. We are heavily scrutinised. I did not say we were not scrutinised.

Senator EDWARDS: But you do not protest to your superiors in other countries that your costs for goods inwards are 3½ times the costs in other jurisdictions within your company.

Mr Gallagher : It is managed, as I said, through the arm's-length principle in the Australian tax guidelines.

Senator EDWARDS: You are the boss here and you are trying to represent your company properly and all the employees that are based here. You are trying to protect your business. You are trying to look good. And perhaps you might want another job somewhere, in another space. On your watch—because this is public—you are letting your parent company charge you 3½ times more than any other country gets charged. I just want to know why you are prepared to let that happen.

Mr Gallagher : Because that is the appropriate, approved process by which that should happen.

Senator EDWARDS: From who? Who approved that?

Mr Gallagher : The arm's-length principles in the Australian tax guidelines.

Senator EDWARDS: So, they have approved that. Let us assume they have that—

Mr Gallagher : Sorry, Senator, but the most recent audit and the transfer price review—

Senator EDWARDS: You are confusing it. Forget about the ATO. Forget that. You as a business operator in this country are paying 3½ times more for the costs of your goods coming into this country than your counterpart in, say, the US; and you are happy about that.

Mr Gallagher : I manage the business within the areas of my control, and the areas are appropriately set up. That is what I do to—

Senator EDWARDS: May I suggest to you, Mr Gallagher, that this is not going too well for you and that, if you are the most senior manager in this business, this is starting to look like something which has been fabricated to minimise your tax in this country. Thank you, Chair.

Senator MILNE: Can I ask one question to follow up on that?

Mr Gallagher : Sorry, can I—

CHAIR: We must give Mr Gallagher the opportunity to respond to that.

Mr Gallagher : I do not agree with that, Senator Edwards, if I may say so. I think we said at the outset that we manage our business appropriately. We manage it within all the appropriate regulations and rules and laws of this land, and that is what we are meant to do; and, if we did otherwise, we would be in a different position.

Senator EDWARDS: So I am wrong? Everything I have asserted is wrong? You pay 3½ times more for the costs of your goods coming into this country than you would in another country. But you observe all the tax rules, which I freely accept; I know that you are operating legally. I do not know how many more times I can say that. But that is not going to pass the pub test as to whether it is actually a fair and reasonable deal for Australians. It does not work for me. But you contest my—

Mr Gallagher : What I was contesting, just to be clear, was that you mentioned, I think, the word 'fabrication'. I was contesting that. I think it is appropriate for me to do so, because we do not fabricate.

Senator MILNE: Is there any consideration of your remuneration personally as head of the Australian operation relative to the profitability of the global company?

Mr Gallagher : The way our remuneration works is quite complex. The global company would set a total remuneration pool at each year end. Then, depending on regional performance of each business, that pool gets split up and flows into different areas, and then it flows into the Australian operation. So my remuneration has some link to the global performance of the company, yes.

Senator MILNE: Has your personal remuneration been going up as the company's performance here in Australia has been going down?

Mr Gallagher : Embarrassing though it is to admit, I have not had a pay increase in the last three years.

Senator MILNE: For the other two companies, is your remuneration as head of the Australian operation linked to the profitability of the global operation?

Mr McDonald : Yes, it is. It is a very similar scenario, and I am in a similar situation to Mr Gallagher: I have had a pay increase for the last three or four years.

Mr Sharkey : AstraZeneca is also in a similar situation: there are metrics related to the global performance and there are metrics related also to the local performance, which come together to determine the overall performance pool. In relation to my salary, I have had no increase in the last year and small increases in the years before that.

Senator MILNE: Just to be clear how this works—because this goes to what is puzzling Senator Edwards and the rest of us—with such high levels of profit from the multinational parent and the arrangement of the tax affairs to guarantee that profit, what incentive would there ever be, if you did not get some of that flowing on to you, to ever manage a company here? Just to come back to what you were saying about how this operates, can you just explain it to me again. So the global company makes x amount of profit. It has structured its affairs to pay the minimum tax wherever it can—to maximise the costs wherever it can and to minimise the tax and sort that globally, with the managers then having to manage in that context. So explain to me how your remuneration relates to the global profitability of the company.

Mr Gallagher : I will try. It is really complex, as I say, and sometimes I am not sure I understand it fully myself. The compensation committee of the global board, as I understand it—I understand this because obviously it has an interest for me—determine at the end of each year what the total pool for our remuneration in terms of bonus is. That pool is then split by each individual business performance within the total enterprise. We have different business units, so each business unit gets its piece of that pool. Then, for each country within that business unit, its performance will drive how much of that pool it receives, and that then gets disbursed depending on people's individual performance within the markets.

Senator MILNE: Is there a loading in that split-up for the fact that the profits are going to be transferred out of some jurisdiction and therefore would penalise people in terms of their remuneration?

Mr Gallagher : My remuneration is set upon the revenue numbers, the other KPIs like colleague engagement et cetera, and our profit locally here. I have no link to any other issues outside Australia in that regard.

Senator MILNE: What about the others?

Mr McDonald : My remuneration is fixed on the Australian business. I can participate in a global share performance plan which is similar to the one Mr Gallagher described, and on the basis of the performance of the company I would get an allocation of shares. Most recently, for the last financial year, we did not meet the global metric, so I did not receive that.

Just to qualify it for the record, I have had some slight salary increases, below CPI, in the last couple of years, but no incremental lift in my salary.

Mr Sharkey : It is very similar.

Senator MILNE: In terms of the shares that you hold as the CEOs of these companies, are the shares in the multinational or the Australian subsidiary.

Mr Gallagher : In our case, we are not publicly quoted here. Pfizer is publicly quoted in the US, so the only shares I could purchase would be the US shares, of which I do hold some.

Mr Sharkey : AstraZeneca is listed in the UK, the US and Sweden.

Mr McDonald : It is the UK shares list.

Senator MILNE: So you all hold shares in the multinational.

Mr McDonald : Yes.

Senator MILNE: Thank you.

Senator XENOPHON: I want to go to you, Mr Gallagher. Are you familiar with an article by that pesky finance journalist Michael West on Saturday, 16 May this year, headed '"Vulgar artifice" helps big pharma shuffle the tax pill'?

Mr Gallagher : I do not have it in front of me. Yes, I am familiar with it.

Senator XENOPHON: You would have read it.

Mr Gallagher : Yes, I have.

Senator XENOPHON: It is quite critical. Just help me out with this. This gives you a right of reply, because what Mr West did, in conjunction with 'the forensic counsel of University of New South Wales academic Jeff Knapp', was to look at some transactions. The article says:

On January 3, 2011, Pfizer Australia Holdings acquired the issued capital of AHP Holdings and Pfizer Perth …

Correct?

Mr Gallagher : Correct.

Senator XENOPHON: Right. And—Mr George, feel free to jump in—the:

… two minions under the control of Pfizer Inc.

Correct?

Mr Gallagher : At the time of the acquisition, as Tony I think clarified earlier, they were not. They were Wyeth-owned entities, and we acquired Wyeth globally. This is part of that transaction in the local market.

Senator XENOPHON: So it was not Pfizer selling to Pfizer?

Mr Gallagher : No. Tony?

Senator XENOPHON: Are you sure?

Mr George : No, Senator. It was part of the global acquisition, as David has said, of Wyeth Inc by Pfizer Inc. In Australia, they were two separate legal groups of companies. In Australia—

Senator XENOPHON: So in Australia they were separate. But internationally they were tied up with Pfizer, were they not?

Mr Gallagher : We acquired Wyeth I think in—was it late 2010? Then each country took it locally—

Senator XENOPHON: Yes. So it was Pfizer selling to Pfizer, was it not? Effectively.

Mr Gallagher : Can you clarify, Tony.

Mr George : In Australia they were separate groups of companies.

Senator XENOPHON: No. Do not say 'in Australia'. As part of the global network of Pfizer companies, they were part of that. Correct?

Mr George : At the time we integrated the companies in Australia, Pfizer Inc had ultimate control.

Senator XENOPHON: So it was Pfizer selling to Pfizer? That is one way of characterising it. In terms of not the actual entities, but they were linked with that.

Pfizer Australia Holdings—

I do know if it is 'Pty Ltd' or 'BV'—

issued 559.7 million new shares at $1.31 a share to a Pfizer Inc affiliate domiciled in the Netherlands to acquire these two new subsidiaries.

Is that right?

Mr George : Yes; that is right.

Senator XENOPHON: I am just reading from Mr West's article. I just want to try and understand this:

The purchase price of the two, and the new share capital created, amounted to $733 million.

Does that ring a bell? It is a lot of money.

Mr George : That is correct.

Senator XENOPHON: As Mr West points out:

… nothing fancy in the financial statements of AHP or Pfizer Perth … The annual financial report of Pfizer Perth shows a minimal R&D expense and the only intangible asset other than goodwill is a patent for $182,000.

Does that ring a bell?

Mr George : The article? Yes it does, Senator.

Senator XENOPHON: It is not wrong?

Mr Gallagher : No.

Senator XENOPHON: So when these two companies were assessed in January 2011 for an exchange value of $733 million, the book value was only $231 million. Is that right?

Mr George : That is correct, Senator; yes.

Senator XENOPHON: So there was a 'new mega-million-dollar intangible asset' that had emerged of:

'product development rights of $461 million'.

Mr Gallagher : Maybe, Senator, if we provide some detail on that.

Senator XENOPHON: That is a lot of product development.

Mr Gallagher : Can we provide detail on that.

Senator XENOPHON: What do you get for $461 million?

Mr Gallagher : Maybe we can provide the detail to you.

Senator XENOPHON: Sure. Please do.

Mr George : It is actually developed product rights, which is the value as determined by independent valuers of the future profits that would arise to Pfizer Australia by acquiring the Wyeth group of companies and its profits.

Senator XENOPHON: AHP was involved with 'animal health products'. Is that right?

Mr George : AHP Holdings had three operating businesses. It had a pharmaceutical business, which was in one company; it had its animal health products business, which was in another company called Fort Dodge—

Senator XENOPHON: Were some of those product development rights related to animal health products, for instance?

Mr George : That is correct.

Senator XENOPHON: I think, as Mr West so kindly said: perhaps it related to the 'treatment of pulmonary edema in Saint Bernards'!

Mr George : Actually, I will just correct my statement. The value of the developed product rights primarily attributed to the pharmaceutical business, some to their consumer business and some to their nutritional business.

Senator XENOPHON: So that $461 million was independently reached?

Mr George : It certainly was, Senator.

Senator XENOPHON: The point made by Mr Jeff Knapp, the academic, was:

'Shortly after the new $733 million of share capital was created in Pfizer Australia, the business assets of AHP and Pfizer Perth, including the mysterious product development rights—

As he puts it—

appear to have been transferred to another company in the Pfizer Australia Holdings group'.

Is that right?

Mr George : As part of the business integration at that time, all of the assets of the Wyeth group of companies were purchased by Pfizer Australia because it wanted to integrate all the businesses into one company.

Senator XENOPHON: What Mr Knapp asserts is that investments in subsidiaries after that transaction were then written down by $591 million. He says:

Creating share capital is the dominant purpose of the scheme. Asset value appears for the creation of share capital and then, just as quickly, asset value disappears.

Mr Gallagher : The developed product rights normally amortise at 17.5 per cent a year, so I think—

Senator XENOPHON: Yes, but there was a write-down of $591 million.

Mr Gallagher : Just a minute. I am trying to clarify.

CHAIR: They sell it to themselves and they write it down after that.

Mr Gallagher : This is a chance to clarify.

Senator XENOPHON: So you sold it to yourself and then you wrote it down by $591 million.

Mr Gallagher : We are trying to clarify the practice for you.

Senator XENOPHON: What does that do for your tax bill?

Mr George : Can I just clarify. Under Australian accounting standards, the developed product rights are written off over 17½ years. Each year, annually, as part of our audit, we test the carrying value of those assets to ensure they are robust. We did not write any of those assets down by $591 million. In 2014, the carrying value was written down by $160 million.

Senator XENOPHON: $161 million, wasn't it?

Mr George : Yes, because at that time we had an independent valuation of those product rights done again. That showed that, as a result of PBS cuts and patent losses, the future value of that developed product could not be sustained.

CHAIR: You purchased it for the value of the patent. Then it was written down a year later, after you had sold it, by $161 million.

Mr Gallagher : It was not written down a year later. It was four years, later, I think.

CHAIR: It was written down by $161 million. Did the same people do both?

Senator XENOPHON: No, it was not written down. The product development rights were written down by $161 million, but investments in the subsidiaries were written down by $591 million.

CHAIR: They are your figures, from your documents. You can take them on notice, Mr George. They are your own figures.

Senator XENOPHON: Are the valuations are to the same value for both transactions?

Mr George : Yes.

CHAIR: So you did not sack them after they got it wrong by $161 million.

Mr Gallagher : I think in the intervening period, in this case, a number of medicines went off patent or had generic competition earlier than we expected. The price disclosure cycle, which had not been foreseen in 2001, accelerated later in the time, and therefore the future value of those assets declined. We have to get an independent valuation; we have no option.

Senator XENOPHON: Again, I just want to be fair and put this to you. Mr West says that this:

… was a share-capital-stripping scheme designed to denude the Australian taxpayer.

In particular, Mr Knapp, the academic, said:

These rights probably never had any value … In my opinion, they are a vulgar artifice. They were needed to create share capital that could be returned from future cashflows without attracting tax consequences. The rights were given life to create share capital and the intangible asset likewise dies when the share capital is returned.

Mr Gallagher : We got the independent valuation.

Senator XENOPHON: It is a pretty strong assertion, and it was published. Presumably you have not taken legal proceedings against Fairfax for that. It is a very strong allegation. What do you say about that?

Mr George : If I could just answer in regard to the tax effect of that transaction, neither the creation of the developed product rights nor the impairment over those years has created any tax benefit. Although we expense them for accounts, they are not deductible for tax purposes, so we do not have a tax benefit from either the annual impairment or the $160 million write-down we took in our 2014 accounts.

Senator XENOPHON: I invite you, should you think it necessary, to elaborate on that, because they are quite damning allegations. Can you address the allegations on notice. You have addressed them in part, but I invite you to address them further if you think it is necessary to do so.

CHAIR: I am conscious of just how late we are now running. I want to thank the three companies before the table—GSK, AstraZeneca and Pfizer—for their participation in this inquiry.

Proceedings suspended from 10:49 to 10:58